Part - 1
Multiple choice question
1. On March 25,2013, the auditor issued an audit report dated March 6, 2013 for the financial statements related to the December 31, 2012 year end of Tim Company. This indicates that the auditor had searched for material unrecorded transactions and events that occurred up to
a. December 31, 2012.
b. March 5, 2013.
c. March 6, 2013.
d. March 25,2013.
2. The auditor may issue an unqualified (clear) report, if the
a. client's financial statements show significant net losses for the current fiscal year and for the two prior years.
b. financial statements were not prepared in accordance with GAAP.
c. auditor was not independent during the fiscal period under audit.
d. scope of the auditor's examination was restricted and the cause of the restriction was beyond the client's control.
3. Inventory accounts for approximately 80% of Sam Company's assets. The auditor has determined that the inventory is materially misstated. The auditor should issue
a. an unqualified (clear) opinion.
b. a qualified opinion.
c. a disclaimer of opinion.
d. an adverse opinion.
4. When a client has failed to follow GAAP, materiality is usually evaluated in terms of
a. the total dollar value of the error(s) in the accounts involved, compared with a predetermined base.
b. the measurability of the dollar error.
c. the nature of the account( s) in error.
d. whether or not the error(s) will affect future fiscal periods.
5. When the client fails to make adequate disclosure in the body of financial statements or in the notes to financial statements, it is the responsibility of the auditor to
a. inform the reader that disclosure is not adequate. The auditor should add the necessary disclosure to the notes to financial statements and issue either a qualified or an adverse opinion.
b. inform the reader that disclosure is not adequate. The auditor should add the necessary disclosure to the notes to financial statements and issue either an unqualified (clear) or qualified opinion.
c. present the information in the audit report and issue a qualified or an adverse opinion.
d. present the information in the audit report and issue an unqualified (clear) or a qualified opinion.
6. The client has presented all of the required financial statements except the statement of cash flows. He believes that this statement is confusing and is not useful to financial statement users. The auditor has completed the audit and is satisfied that everything, with the exception of the missing statement, is fairly presented. The auditor should render
a. an unqualified (clear) opinion.
b. a qualified opinion.
c. a disclaimer of opinion.
d. an adverse opinion.
7. With respect to any audit engagement, the ultimate decision as to whether or not an auditor is independent must be determined by the
a. auditor.
b. client.
c. audit committee.
d. tax department.
8. Prior to beginning field work on a new audit engagement in which the auditor does not have expertise in the industry in which the client operates, the auditor should
a. reduce the audit risk by lowering materiality.
b. increase substantive testing to compensate for her lack of expertise.
c. engage financial experts who are familiar with the industry.
d. obtain knowledge of matters that are pertinent to the nature of the client's business.
9. The responsibility for adopting sound accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests with an entity's
a. management.
b. auditor.
c. management and its auditor equally.
d. internal audit department.
10. During an audit of Birch Ltd., auditor Josh Brown uncovers circumstances that lead him to suspect that there may be management fraud. He should
a. issue an adverse opinion.
b. issue a disclaimer of opinion.
c. withdraw from the engagement.
d. evaluate the implications of the circumstances and consider modifying his audit
procedures and evidence-collecting techniques.
11. Which of the following statements concerning the auditor's use of a specialist's work is correct?
a. If the specialist is related to the client, the auditor is not permitted to use the specialist's findings as corroborative evidence.
b. If the auditor believes that the determinations made by the specialist are unreasonable, only an adverse opinion may be issued.
c. The specialist is never identified in the auditor's report.
d. The specialist should have an understanding of the auditor's use of the specialist's findings.
12. The audit risk model is used primarily
a. for planning purposes to determine how much evidence to accumulate.
b. during tests of controls.
c. to determine the type of audit opinion to issue.
d. to evaluate the evidence accumulated.
13. If the planned detection risk is reduced, then the amount of evidence that the auditor must accumulate
a. cannot be determined.
b. will remain unchanged.
c. will increase.
d. will decrease.
14. Which of the following statements about control risk and the audit risk model is false?
a. If the auditor concludes that internal controls are completely ineffective in preventing or detect errors, control risk would be assessed as O.
b. Control risk is a measure of the auditor's assessment of the likelihood that errors will not be prevented or detected by the client's internal controls.
c. There is an inverse relationship between control risk and detection risk.
d. There is a direct relationship between control risk and evidence.
15. A major limitation in applying the audit risk model is the
a. difficulty in defining the terms of the model.
b. difficulty in understanding the effect on other factors in the model when one factor is changed.
c. difficulty in measuring the components of the model.
d. failure of the CICA to incorporate the model into the CICA Handbook.
16. The auditor may compensate for a weakness in internal controls by increasing
a. the level of detection risk.
b. compliance testing.
c. the assessment of audit risk.
d. substantive testing.
17. For financial reporting purposes, a client changes from the straight-line method of amortization to the declining-balance method of amortization. This is reported in the notes to the financial statements, even though it has an immaterial effect on the current financial statements. However, this change will have a significant impact on future fiscal periods. The auditor should render a(n)
a. unqualified (clear) opinion.
b. qualified opinion.
c. adverse opinion.
d. disclaimer of opinion.
18. Even though a company designs an ideal system of internal controls, the effectiveness of the system depends upon the
a. adequacy of the system.
b. proper implementation by management.
c. ability of the internal audit staff to maintain it.
d. competency and dependability of the people using it.
19. Which of the following duties would indicate a weakness in internal controls?
a. The controller is responsible for the accounting function.
b. The treasurer is responsible for the custodianship of cash.
c. The internal auditor reports to the board of directors.
d. The controller is responsible for the custodianship of buildings and equipment.
20. Audit evidence concerning the proper segregation of duties is usually obtained by
a. inspecting third-party documents containing the initials of the employees who applied the control procedures.
b. directly observing employees as they perform control procedures.
c. preparing a flowchart of duties performed and the employees who perform them.
d. making inquiries of the coworkers of employees who perform the controls to see if the employees really do carry out the necessary duties.
21. The primary concern in testing payroll-related liabilities is to make sure that
a. accruals are properly valued.
b. transactions are recorded in the proper period.
c. there are no understated or omitted accruals.
d. accruals are not overstated.
22. Effective internal controls over the payroll function should include
a. reconciling the total time recorded on time-clock punch cards to job time tickets.
b. supervision of the payroll department by the human resources manager.
c. making the payroll department responsible for maintaining employee personnel records.
d. comparing the total time spent on jobs to the total time indicated on time-clock punch cards.
23. The auditor may observe the distribution of pay cheques to ascertain whether
a. the pay rate authorization function is properly separated from the operating function.
b. deductions from gross pay are calculated correctly and properly authorized.
c. employees of record actually exist and are employed by the client.
d. paycheques agree with the payroll register and the time cards.
24. In a good system of internal controls, the purchasing department should not be responsible for
a. finding the lowest cost supplier.
b. accounting for the numeric sequence of purchase requisitions.
c. designing the purchase order form.
d. authorizing the acquisition of goods.
25. One of the audit procedures that an auditor carried out was to compare recorded transactions in the acquisitions journal with the suppliers' invoices, receiving reports, and other supporting documentation. This substantive test was done to satisfy the objective of
a. existence.
b. authorization.
c. completeness.
d. accuracy.
26. During the course of her audit, an auditor determines that her client has paid a supplier's invoice twice for the same shipment-once based upon the original invoice and once based upon the monthly statement. An internal control procedure that should have prevented this duplicate payment is the
a. attachment of the receiving report to the disbursement voucher.
b. use of pre-numbered disbursement vouchers.
c. use of analytical procedures.
d. use of pre-numbered receiving reports ..
27. A substantive test that requires the auditor to physically examine assets satisfies the audit objective of
a. classification.
b. completeness.
c. cutoff.
d. existence.
28. If the perpetual inventory records show lower quantities of inventory than the physical inventory count, the difference may be due to unrecorded
a. sales.
b. sales discounts.
c. purchases.
d. purchase discounts.
29. A weakness in internal control procedures over recording equipment retirement may cause the auditor to
a. inspect certain items of equipment in the plant and trace those items to the accounting records.
b. review the property master file to ascertain whether amortization (depreciation) was taken on each item of equipment during the year.
c. trace additions to the Other Assets account to search for equipment that is still on hand but not in use.
d. select a sample of equipment items from the accounting records and physically locate the items on the client's premises.
30. lf this client refuses to prepare and sign a representation letter, the auditor should render a(n)
a. qualified opinion or a disclaimer of opinion.
b. adverse opinion or a disclaimer of opinion.
c. qualified opinion or an adverse opinion.
d. unqualified opinion.
31. In the testing for cutoff, the objective is to determine
a. whether all of the current period's transactions were recorded.
b. that no transactions from the prior period were recorded in the current period's balances.
c. that no transactions of the current period were delayed and recorded in a future period.
d. whether transactions were recorded in the proper period.
32. Tests of details of balance are specific procedures intended to
a. identify the details of internal controls.
b. prove that accounts with material balances are classified correctly.
c. test for monetary errors in the financial statements.
d. prove that debits and credits on the trial balance are in balance.
33. Which of the following statements best describes the auditor's responsibility for detecting fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from the non-performance of audit procedures specifically described in the engagement letter.
b. The auditor must consider the need to extend auditing procedures to actively search for evidence of fraud in all situations.
c. The auditor must extend auditing procedures to actively search for evidence of fraud where the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified (clear) opinion is rendered.
34. Which of the following forms of evidence would be the least reliable?
a. the auditor's count of marketable securities
b. correspondence with the client's stockbroker concerning the client's investments held in trust by the brokerage firm
c. minutes of the board of directors' meeting authorizing the purchase of marketable securities to be held for the next two years
d. responses to the auditor's questions by the president and controller regarding the Investment in Marketable Securities account
35. The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to
a. select a sample of duplicate sales invoices and trace each one to the related shipping documents.
b. trace a sample of shipping documents to the related duplicate sales invoices.
c. trace a sample of sales journal entries to the accounts receivable sub-ledger.
d. compare the total of the accounts receivable trial balance to the balance of the accounts receivable control account in the general ledger.
36. An example of vouching is
a. tracing details from receiving reports to the acquisitions journal.
b. tracing details from the acquisitions journal to supporting suppliers' invoices.
c. tracing details from duplicate bank deposit slips to the cash receipts journal.
d. tracing details from cancelled cheques to the cash disbursements journal.
37. An example of an analytical procedure is comparing
a. financial information with similar information from the industry in which the entity operates.
b. recorded amounts of major disbursements with appropriate invoices.
c. results of a statistical sample with the expected characteristics of the actual population.
d. computer-generated data with similar data generated by a manual accounting system.
38. Investigation of new clients and re-evaluation of existing clients are essential steps in determining
a. inherent risk.
b. audit risk.
c. control risk.
d. financial risk.
39. The purpose of an engagement letter is to
a. put the terms of the engagement in writing to prevent any misunderstandings.
b. reduce the auditor's liability to external users of the financial statements.
c. meet the requirements of contract law, which requires contracts for professional services to be written in order to be enforceable.
d. facilitate the scheduling of appropriate audit staff.
40. Working papers prepared during the audit engagement are the property of
a. the auditor, excluding any working papers prepared by the client for the auditor.
b. the auditor, including any working papers prepared by the client for the auditor.
c. the client.
d. the auditor and the client jointly.
41. An auditor evaluates the existing system of internal controls in order to
a. determine the extent of the substantive tests that must be performed.
b. determine the extent of the compliance tests that must be performed.
c. ascertain whether irregularities are probable.
d. ascertain whether any employees have incompatible functions.
42. An effective procedure to test for unbilled shipments is to trace details from the
a. sales journal to the shipping documents.
b. shipping documents to the sales journal.
c. sales journal to the accounts receivable sub-ledger.
d. sales journal to the general ledger sales account.
43. An auditor has determined that her client has an excellent system of internal controls.
Which of the following audit procedures is she least likely to perform?
a. physically inspect a sample of inventory
b. search for unrecorded cash receipts
c. obtain a client representation letter
d. confirm balances in the accounts receivable sub-ledger
44. In a good system of internal controls, a cashier who receives remittances from the mailroom should not
a. prepare the daily deposit slip.
b. make the daily deposit.
c. post the receipts to the accounts receivable sub-ledger.
d. endorse the cheques received.
45. If invalid sales are included in a client's accounting records, there will be an
a. understatement of assets and net income.
b. overstatement of assets and net income.
c. understatement of assets and an overstatement of net income.
d. overstatement of assets and an understatement of net income.
46. Tests of details of balances are directed towards
a. balance sheet accounts for all cycles.
b. income statement accounts for all cycles.
c. balance sheet accounts for some cycles and income statement accounts for other cycles.
d. all general ledger accounts for all cycles.
47. An auditor is engaged to perform the audit for Covey Cosmetics Ltd. for its year ended December 31, 2013. Covey's policy is to record sales when title to sold merchandise passes to the buyer. Therefore, the books and records will contain errors if the December 31, 2013 journal entries include sales recorded
a. before the merchandise was shipped.
b. at the time the merchandise was shipped.
c. several days subsequent to when the merchandise was shipped.
d. when the merchandise reached its destination.
48. A positive accounts receivable confirmation is more reliable evidence than a negative accounts receivable confirmation because
a. the auditor has a document that can be used in court.
b. follow-up procedures can be performed if a response is not received from the customer.
c. the customer's lack of response indicates agreement with the stated balance.
d. fewer confirmations can be sent out.
49. Mike Adams has been engaged to perform the audit of a cable television company that services a rural community. All of the accounts receivable balances are small and customers are billed monthly. Adams has determined that the company's internal controls
are effective. To determine the validity of the accounts receivable balances at the balance sheet date, Adams should
a. send positive confirmation requests.
b. send negative confirmation requests.
c. examine evidence of subsequent cash receipts instead of sending any confirmation requests.
d. use statistical sampling instead of sending confirmation requests.
50. In a system of strong internal controls, the employee who maintains the accounts receivable sub-ledger should not approve
a. employee overtime wages.
b. credit granted to customers.
c. customer account write-offs.
d. cash disbursements.
Part - 2
1. If the balance sheet of a company is dated December 31, 2012, the audit report is dated March 6, 20l3, and both are released to the public on March 15,2013, this indicates that the auditor has searched for the material unrecorded transactions and events that occurred up to
a. December 31, 2012.
b. March 6, 2013.
c. March 15,2013.
d. December 31, 2013.
2. Glass Distributing Limited has requested that the audited financial statements be completed by January 5, five days after the December 31 year end. This means that the auditor will be unable to verify subsequent payments of accounts receivable and will be unable to determine whether accounts payable have been set up correctly. What type of audit report should Glass Distributing Ltd receive if the auditor is unable to use alternate procedures for two audit areas?
a. disclaimer
b. adverse
c. qualified
d. unqualified
3. The auditor has decided to collect more evidence and review the engagement more carefully than usual. This is necessary because
a. the auditor has decided that a lower audit risk on the audit is appropriate.
b. inherent risk at the engagement has decreased from the prior year.
c. the auditor has decided that a higher audit risk on the audit is appropriate.
d. control risk at the engagement has decreased from the prior year.
4. Analytical procedures are mandatory during which phases of the audit?
a. tests of controls and tests of details
b. planning and completion
c. planning and tests of details
d. tests of details and completion
5. One of the hazards associated with the use of ED I (electronic data interchange) is that
a. an incorrect credit card number could be used to bill a purchase.
b. amounts could be taken from or deposited to the wrong account.
c. items could be shipped to the wrong location.
d. products could arrive in damaged condition due to rough handling.
6. Show a Company decided to inflate sales by recording fictitious sales. Several non- existent clients were created and the sales were added into the sales journal throughout the year. The general transaction-related audit objective affected by these actions is
a. occurrence.
b. completeness.
c. accuracy.
d. posting and summarization.
7. The auditors have decided upon a materiality level of $1 00,000 for their audit of Cina Import Limited. Which one of the following errors would be considered more important by the auditor?
a. an error in accounts receivable cutoff of $50,000
b. an overstatement of accounts payable of $15,000
c. an error in allocation between accounts receivable and accounts payable of $75,000
d. an illegal payment of $50,000
8. Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements and the wrong type of audit opinion is issued, the audit firm
a. has failed to follow generally accepted auditing standards.
b. deserves to lose the lawsuit.
c. should be asked to defend the quality of the audit.
d. should not be held responsible for the financial loss suffered by others.
9. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to
a. be an insurer of the fairness in the statements.
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial statements.
d. provide reasonable assurance that material misstatements will be detected.
10. In a well-run business with a corporate code of ethics that is demonstrated and enforced by management, the auditor will decide that
a. inherent and control risks can be reduced.
b. there is an increased risk of fraud or illegal activities.
c. inherent and control risks need to be increased.
d. there is a need for more detailed documentation in the working papers.
11. The most important type of protective measure for the safeguarding assets and records is
a. adequate segregation of duties among personnel.
b. proper authorization of transactions.
c. the use of physical precautions.
d. adequate documentation.
12. After considering a client's internal controls, an auditor has concluded that they are well designed and are functioning as intended. Under these circumstances, the auditor would most likely
a. perform tests of controls to the extent outlined in the audit program.
b. determine the control procedures that should prevent or detect errors and irregularities.
c. use a combined audit approach that includes tests of controls and substantive tests.
d. determine whether transactions are recorded to permit preparation of financial statements in accordance with GAAP.
13. Control risk has been assessed at 100% for your client. What audit approach will you follow?
a. a combined approach
b. a substantive approach
c. reliance on analytical review and tests of controls
d. reliance on tests of controls and tests of details
14. Sampling risk (sampling error) is an inherent part of sampling that results from
a. inappropriate sampling procedures.
b. failure to recognize exceptions.
c. testing less than the entire population.
d. weaknesses in the client's internal control system.
15. Which of the following statements is a valid criticism of the use of non-statistical sampling methods?
a. Many audit tests, such as footing of journals, must be performed outside a statistical sampling context.
b. The cost of performing random selection or testing often exceeds the benefits.
c. Non-statistical sampling does not differ substantially from statistical sampling methods.
d. Conclusions may be drawn in more precise ways with statistical sampling methods.
16. If the auditor is convinced that the client has an excellent internal control structure, the amount of audit evidence to be gathered
a. can be significantly less than where internal control is not adequate.
b. will not be affected, since the auditor must arrive at an independently determined Opinion.
c. must be increased to support the auditor's belief.
d. is not determinable.
17. Clear Way Limited uses a distributed processing system, where there is an information system at head office and at each of its 60 locations. At night, transactions are transferred to head office to update the central databases. Which of the following controls would best prevent unauthorized access to head office programs?
a. Programs are all stored in source code at all locations.
b. Clear responsibilities are assigned and enforced with respect to program changes.
c. Automated techniques are used to track program changes.
d. Only operations staff are permitted to implement program changes from the test to the production libraries.